The present day P&I market provides third party liability cover to the ship owners worldwide on a non-profit making “mutual” basis as opposed to the commercial insurers who understandably provide insurance for all other risks to earn profit in order to pay dividends to their share holders. The structure of this non profit “mutual” insurance market took root in England in the 18th century where “Hull Insurance Clubs” were established to counter the monopoly of the three institutions only who were, under the then prevailing law, allowed to insure British ships.
Hull Insurance Clubs
The basic principle of these Hull clubs was simple. A group of ship owners who formed the club would agree to share with other members of the club the cost of any hull claim, which an individual member suffered, rateably according to the value of their vessel or vessels owned by that member of the club. By pooling the risks, instead of paying the premium in advance to the profit making underwriters, they provided themselves with far cheaper security than was available in the market. In addition they were able to exercise a greater control over handling of the claims.
These clubs began to suffer from the increased competition after the Hull Insurance monopoly was abolished and their numbers reduced, However, they continued to exist in order to also cover new liabilities such as “personal injuries and loss of life” and “excess collision liabilities”, which the ship owners were made to accept, because these liabilities could not be covered under the hull policies. These clubs were the ancestors of the present day Protection & Indemnity clubs.
Modern Day P & I Clubs.
The rapid developments in the maritime law went hand in hand with the increase in volume and complexities of the world trade. The risks covered by protection & indemnity Associations expanded. By the beginning of 20th century most of the clubs, which constitute the modern P&I clubs, were established. The method of operation of these clubs was similar to their predecessors.
As the liabilities increased in value, few of the large P&I clubs established a “Pooling Agreement” in 1899. Under this, the members of the “Pool” agreed to share rateably large claims above a modern retention. These 15 clubs are known as “International Group of clubs.” Since they share their claims, all of them have similar Rules so that there is a level playing field. About 90% of the world’s tonnage is entered with the International Group of clubs.
Principle And Advantages Of Mutual Insurance.
As has been mentioned earlier, the P&I clubs operate as non- profit making mutual insurance organizations. The basic principle is that the ship owners entered with a P&I club share their claims and rateably contribute to the funds which pays the claims and clubs’ actual expenses. This provides following advantages:
1. Cost and spread: Being a non-profit making organization the cost to the members of insuring their liabilities is less than that of the commercial markets who have to make profit in order to pay dividends to their shareholders. The principle of fair sharing of claims provides the spread, which is further enhanced by additional spread through the Pooling Agreement.
2. Security: Security of P&I clubs is ultimately the credit worthiness of the whole membership because the mutual premium or calls to cover the claims is payable by the members themselves.
3 Adaptability: Since the P&I clubs exist for the benefit of the ship owners and are controlled by them, they are able to respond to the insurance needs of the members as the new developments in the legislation open up new requirements.
4. Claim handling services: Because the ship owners administer the affairs of the club themselves through their Board/ Committee, they take deep interest in the claims encountered and the manner they are handled. The owners have little time themselves to do the day to day administration, they appoint a Manager. The Managers have competent and experienced staff to handle the claims, do the underwriting and advise the members on their trading, claim prevention and other important issues. The managers also keep abreast of incoming legislations and render their advise as consultants to the International organizations such as IMO, BIMCO, Classification Societies etc. so as to protect the interests of the ship owners.
Scope Of Cover:
P&I clubs cover most of the third party liabilities to which a ship owner may become liable any where in the world. These could be under contracts (for example cargo liabilities), or in tort (for example Collision), or under any statute (for example wreck removal). In addition the clubs also cover certain fines and penalties levied against the ship or her owner.
Risks That Are Not Covered
a. Hull and War risks: the market underwriters insure these risks. Under the Indian Insurance Act, a ship owner must insure these risks with one of the Indian insurance companies,
b. Damage to the owner’s own property and their own financial losses: These are not mutual risks and an owner can insure some of these in the alternative markets.
c. Risks subject to double insurance: Under the club Rules, these risks are excluded.
d. Claims arising out of unlawful or extraordinary hazardous trade: Being a mutual non-profit principle that applies, there must be commonality of risks between the club members. Unlawful and risks from extraordinary trades are not common and therefore excluded.
e. Non-compliance with the statutory requirements: All members must maintain their vessels in Class and comply with all statutory requirements, viz, Safety Equipment; Load Lines etc. Claims arising due to breach of these are therefore excluded.
f. Member must act as a prudent uninsured: The Marine Insurance Act provides that an assured must act prudently in any given circumstances. If he feels that he can recover his loss from the underwriters and therefore need not bother, then he prejudices his cover. In order not to breach this statutory obligation, the test is that all his actions must be such as if he himself will bear the losses.
Principles Of Indemnity
“Protection & Indemnity” as the name suggests, means that the club protects a member from incurring or minimizing liabilities. If, however, the member becomes liable then the club will indemnify him for such losses in the terms of his entry. This means that as a principle, the member must first pay the claim and thereafter seek reimbursement from the club.
Specific Areas Of Cover
The risks that are covered by P&I clubs are set out in their Rule Book, a copy of which should be available on every ship. In brief they are:
(a) Personal injury claims: Cover is provided for a member’s liability for death or personal injury to passengers, crew or other third parties, such as stevedores who are injured as a result of any negligent act or omission which occurs on board, or in relation to an entered ship; or which arises out of an indemnity to the dock owners or operators, provided such indemnities have been approved by the club.
(b) Crew claims: This category of claims relate to the costs incurred by a member in relation to crew, following a causality or death, funeral expenses, illness or injury, it extends to ship wreck, unemployment indemnity, crew repatriation costs and cost of crew substitution. The compensation payable is in accordance with Compensation Act or similar enactments or under collective or special agreements approved by the club. Allied to this aspect of the cover, is a cover for loss of crews personal effects, liabilities in relation to deserters and stowaways as well as port and deviation expenses in certain circumstances.
(c) Collision liabilities: Damage to the owned ship arising out of a collision with another ship and 3/4th of the damage limited up to 3/4th of the hull value is normally covered under the Hull & Machinery Policy. The club covers the following:
- 1/4th of the collision liability under London Institute Time clauses (Hull)
- Excess collision liability. This aspect of the club cover comes into play when 3/4th of the vessel’s insured value (the extent of the hull underwriter’s liability under the hull policy) is less than 3/4th of the vessel’s liability to the colliding vessel. Subject to the proviso as to proper valuation of the vessel, the club covers this excess not recoverable under the hull policy.
- Normally an owner has defence to the loss of or damage to the cargo, carried on own vessel that is caused by the collision. Under certain jurisdiction, however, notably the U.S.A., an owner may become liable to the loss or damage to the cargo carried on the owned vessel. The P&I clubs cover such excess liability.
- Risks excluded under 3/4th collision liability clause: There are numbers of exclusions under the Institute Time Clauses (Hull) in respect of 3/4th collision liability, in particular wreck removal, personal injury and oil pollution. The club Covers these excluded claims.
(d) Fixed and floating object claims: This aspect of the club cover protects an owner against claims arising when his vessel causes damage to docks, shore , installations, mooring buys or any other fixed or floating object which is not classified as a vessel.
(e) Damage to vessels or property other than by collision; Under this heading an Owner is Covered for liabilities for loss or damage suffered by another vessel or property, caused due to the negligent navigation or management of the entered ship.
(f) Liabilities under towage contracts: The club covers loss of or damage for which a member may become liable under the terms of a contract of towage of the entered ship in the ordinary course of trading, provided the risks fall outside the hull Policies. The club also covers loss or damage to which a member may become liable under a contract of towage by an entered ship provided that the towage contract is approved by the club.
(g) Pollution: The ship owner’s pollution liabilities under national or International Conventions or under common laws have become particularly onerous in recent years. The club covers these pollution liabilities up to a limit of US$ one billion.
(h) Wreck Removal: A member is covered for costs and expenses in raising, removal and destruction, lighting and marking of the wreck of the entered ship provided the owners are legally liable to do so.
(i) Quarantine expenses: The member is covered for the quarantine and extraordinary expenses due to an outbreak of infectious diseases, provided that the owner has taken all steps necessary to avoid ordering the ship to a port known to be or should have been reasonably anticipated that she would be quarantined.
(j) Cargo claims: The club covers-a member’s liability for loss of or damage to the cargo or other properties carried by, or intended to be carried on an entered vessel, provided always that the contract of carriage is subject to Hague or Hague- Visby Rules or similar.
Under this heading, the member can also recover the extra costs (in excess of the costs which would normally have been incurred by him under the contract of carriage) of discharging or disposing of the damaged or worthless cargo, provided that he is liable for such costs and has no recourse to recover it from any other party. Allied to this risk, a member is also covered in respect of cargo’s proportion of General Average including special charges, which are not legally recoverable from the cargo solely by reason of a breach of the contract of carriage.
(k) Fines: A member is also covered in respect of certain fines imposed upon him in respect of an entered ship by a competent authority in respect of short or over delivery of cargo, or breach of documentary regulations, breach of immigration laws, pollution, smuggling etc.
(l) Legal and other costs: The club covers costs and expenses including legal costs, which are incurred with the consent of the club in avoiding any liability or expenditure, against which the club insures him.
Because of the close relationship between each ship owner member and his club, a tradition of claim service developed which gave greater emphasis of handling of claims and related aspects of Members business by the club managers. than perhaps is the case of commercial market.
Network of correspondents
The Managers are based at their head offices. They have also developed a network of expert correspondents in all major ports around the world to assist any entered ship locally in case of any difficulty. They are listed in the club’s Rule Book and also on the club’s web site. The correspondents are chosen because of their expertise in local laws, customs and practices. They should be contacted in case of any need.
Appointment of surveyors
If there is an incident likely to give rise to a claim, which may concern the club, the club of its local correspondent must be advised. They will appoint a surveyor, or a lawyer who will collect evidence and generally look after the member’s interests The ships staff should make appropriate entries in the relevant log books and preserve all evidence, and should cooperate with the club correspondents and surveyor appointed by or on behalf of the club.
Very often the claims are raised well after the ship has departed from the port. By then it may be too late to collect evidence that will assist in denying or minimizing the ship’s exposure. It is therefore important that the evidence is collect as soon as is possible. As soon as a notice of incident is received, the club’s correspondent and or the surveyor/lawyer will visit the vessel to collect all necessary evidence in the form of copies of log books, cargo stowage plan, photographs or any other relevant evidence.
Appointment of lawyers
In case of any serious incident. Which may give rise to a potentially large claim, a lawyer may be appointed by the club or it’s correspondents. He will take statements from the witnesses and preserve the evidence to be used if the matter ultimately lands in a court of law.
Provision of a security
A further important aspect of the club service is the provision of a guarantee to prevent the arrest of, or to secure release from arrest of an entered ship. service of provision of security is not a contractual right of a member, but is always provided at the discretion of the club. Because of the net-work of the club’s correspondents and the fact that a club’s letter of guarantee is often accepted, the clubs are able to provide a guarantee speedily and at less cost than the banks, thus saving their members from the damaging delay that could result from the arrest of the vessel.
The International Group of P&I clubs has also developed as a representative of ship owner’s views in International and National discussions .For example, it has observers status at the I.M.O. and is affiliated to the International Union of Marine Underwriters. It is also involved with the Committee Maritime International, Classification Societies and Bimco. Thus the Group is able to monitor developments of international maritime legislation as it occurs, and present the ship owners case where appropriate.